- Americans who move abroad are still responsible for filing their taxes with the IRS.
- Giving up US citizenship to avoid paying US taxes may seem like a tempting idea, but experts are against it.
- “It doesn’t usually make financial sense, and there are a few reasons why,” said Italy-based Alex Ingrim, a financial adviser at Chase Buchanan Wealth Management.
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Americans who move abroad are still responsible for filing their taxes with the IRS, Sometimes in addition to the taxes paid in the place of residence. Unsurprisingly, the idea of renouncing their American citizenship may have crossed their minds at least once.
However, experts advise against the move.
“It doesn’t usually make financial sense, and there are a few reasons why,” said Italy-based Alex Ingrim, a financial adviser at Chase Buchanan Wealth Management.
While there may be some cases where the “pain of being an American” comes up in tax liability, as an American “you rarely pay two taxes,” Ingrim says.
Judd Boudreaux, a partner and senior financial planner at The Planning Center in New Orleans, also notes that renouncing citizenship is not an easy process, and it can be difficult to go back if you change your mind.
So taxpayers looking to move abroad in the coming year may need to plan ahead to find out what their tax residency will look like.
Before moving abroad, check what your income situation will be: whether you will be working or relying on retirement savings.
“America and Country [of residence] It may have an income tax treaty, it may have a property tax treaty. [or] Boudreaux, a member of CNBC’s FA Council, said it could have a regularization agreement that deals with retirement income, such as Social Security. Everything depends on different rules.
In the meantime, some European countries, such as Portugal, tax retiree income, so expats’ tax liability is to the foreign country of residence under a double tax treaty, not the U.S., Ingrim said.
Under this agreement, U.S. tax return filers can use credits paid in another country to offset their U.S. tax liability, he added. For example, if Portugal has higher tax rates, it avoids US liability.
Similarly, if you earn Portuguese income and pay Portuguese income tax, you’ll get some credits when you file in the U.S. for taxes paid overseas, Boudreaux explained.
“The pain of being an American comes when you go to file … and it costs a lot of money to file your taxes in two different countries,” he said.
Americans who revoke their citizenship may do so to seek different investment options or much lower tax jurisdictions, Ingrim said.
For example: An American moves to a place that doesn’t pay much, like Monaco or Dubai. However, they still have US tax liability.
“For those people, it’s painful, and [they] “They chose to give up their citizenship to avoid paying taxes,” Ingrim said.
Others may want to explore investment options such as European mutual funds, exchange-traded funds, savings products and wealth structuring solutions.
However, “if you buy a mutual fund, you can run into a really negative set of tax rules,” Boudreaux said.
Jordi Mora Igual | moment | Getty Images
The IRS considers these products passive foreign investment corporations, or PFICs, and the federal agency has rules around the types of structures in which U.S. taxpayers can invest, Ingrim said.
“The report is extremely difficult and costs a lot of money,” he said. “It can be really frustrating for people trying to build their savings.”
This may be particularly applicable to Americans working in Euros who do not want to send money back to the US and invest in dollars, or if they want to take advantage of the tax benefits that some European mutual funds may offer in certain jurisdictions.
However, despite the strict protections, American citizens can still access the American financial system, which is something that should be considered before giving up the passport.
The U.S. financial system is “really a great place to invest, trade and hold your money,” Ingrim said.
Most European banks charge high fees for the same services and are constantly trying to sell new products.
“The American system is more developed,” he added, “and if Americans have that attitude when they live abroad … they’ll be a little happier being Americans.”
Overall, giving up your US citizenship is a bigger process than it needs to be, Boudreaux said.
“It’s not necessarily easy, it can be a bit expensive and it’s one of the hardest things to undo once you do it,” he said.
Additionally, you may owe an exit tax as a foreign national under the Veterans Income Assistance and Relief Tax (HEART) Act of 2008, Boudreaux added.
“You can’t just go out and pay taxes on things that were in the U.S. and then go overseas,” he said.